NGUESSAN Joseph KOUASSI
Civil engineer
Msc Economic Intelligence & Project management
ID #: UD6981BPM13496
A Final Thesis Presented to
The Academic Department
Of the School of Business and Economics
In Partial Fulfillment of Requirements
For the Degree of Doctor in Project Management
ATLANTICINTERNATIONALUNIVERSITY
HONOLULU, HAWAII, USA
2009, March
Table of contents
Abstract…………………………………………………………………………………………..6
Acknowledgement…………………………………………………………………………….7
Chapter 1 – INTRODUCTION…………………………………………………………………..8
1.1.Context and background of the thesis…………………………………………..9
1.2.Area of the research…………………………………………………………….....10
1.3.Research hypothesis and methodology………………………………………..11
Chapter 2 - THEORY AND DEFINITION OF BOT PROJECTS CONCEPT…………………12
2.1 Structure of BOT Projects……………………………………………………………….15
2.2 Parties to BOT projects…………………………………………………………………17
2.3 The agreements………………………………………………………………………….21
2.4 Construction Contract…………………………………………………………………23
2.5 Operating & Maintenance Agreement…………………………………………….29
2.6 Finance Facility. …………………………………………………………………………35
2.7 Other Documents……………………………………………………………………….36
2.8 BOT contracts issues…………………………………………………………………….36
Chapter 3: THE CONCEPT OF PROJECT RISK MANAGEMENT…………………………. 50
1. Risk Analysis & Risk Management………………………………………………………..51
2. Decision Tree Analysis ……………………………………………………………………..53
3. Porter's Five Forces………………………………………………………………………….60
4. SWOT Analysis………………………………………………………………………………..65
5. The project risk management approach……………………………………………..69
6. Project Risk Management: A Proactive Approach…………………………………..74
7. The security triangle of project risk management…………………………………...77
8. Conclusion of the chapter………………………………………………………………..78
Chapter 4: THE CONCEPT OF PROJECT FINANCING……………………………………..80
1. Risk minimization process………………………………………………………………….81
2. Construction phase risk - Completion risk………………………………………………83
3. Operation phase risk - Resource / reserve risk………………………………………..84
4. Risks common to both construction and operational phases……………………86
5. Finance procedure……………………………………………………………………….88
6. Project Finance Case Study 1- Zarafshan-Newmont Joint Venture………………88
Chapter 5: RISK, UNCERTAINTY AND OPPORTUNITY……………………………………..100
1. Risks in PPP Projects…………………………………………………………………………101
2. Risk Assessment Approaches……………………………………………………………..103
3. Risk analysis techniques and selection criteria ……………………………………….107
4. Problems of current techniques………………………………………………………….107
5. Proposed approach………………………………………………………………………..109
6. Elements of the Conceptual Model……………………………………………………..111
7. Embedded Decisions……………………………………………………………………….112
8. State Variables……………………………………………………………………………….112
9. Calculated Variables……………………………………………………………………….113
10. Objective Function………………………………………………………………………...114
Chapter 5: THE LIFE – CYCLE RISK MANAGEMENT FRAMEWORK FOR PPP INFRASTRUCTURE PROJECTS…………………………………………………………………………………………116
1. What is mean by PPP?...... 116
2. Benefits and limitations of PPP projects………………………………………………….117
3. Major risk factors contributing to success or failure of PPP projects……………….118
4. Correct and precise diagnosis of a need is a fundamental step in the search and prescription of the solution…………………………………………………………………...119
5. Optimum ticket or toll price is the only way to ensure the usage of the PPP infrastructure and hence return on investment…………………………………………..120
6. Achieving value for money and Public Sector Comparator (PSC)……………..….120
7. Ensuring balance of interests for different project partners and stakeholders, including protecting public interests…………………………………………………………………….121
8. Proper risk allocation/sharing is of absolute importance to ensure success of PPP projects……………………………………………………………………………………………122
9. A proposed life-cycle risk management…………………………………………………123
Chapter 6: THE RISK IN BOT PROJECTS……………………………………………………….130
1. The context……………………………………………………………………………………..130
2. Key requirements of a DSS ……………………………………………………………………131
3. Review of current DSSs ………………………………………………………………………...132
4. Numerical example …………………………………………………………………………….136
5. The ANP advantage ……………………………………………………………………………137
Chapter 7: PREVENTIVE LAW AND RISK MANAGEMENT IN FINISH PPP PROJECTS………..139
1. The Context………………………………………………………………………………………..139
2. PFI/PPP project agreements - risk allocation issues to consider in flow down of risks.139
3. Flow-down or step-down of risks and obligations…………………………………………..142
Chapter 8: RISK ASSESSMENT TECHNIQUES THROUGH THE PPP PROCUREMENT PROCESS……..156
1. The Context………………………………………………………………………………………..156
2. The risk transfer process …………………………………………………………………………156
3. How risk is assessed?...... 157
Chapter 9: VALUE FOR MONEY (VFM) AND RISK ALLOCATION MODELS IN CONSTRUCTION PPP PROJECTS………………………………………………………………………………………………161
1. Selecting a Viable Build-Operate-Transfer (BOT) Project to Propose…………………..161
2. Conceptual model ………………………………………………………………………………163
3. Current research ………………………………………………………………………………….163
4. Preliminary Results ………………………………………………………………………………...164
5. Factor enhancing VFM in PPP projects ……………………………………………………….164
CASE STUDY 2 - RIVIERA-MARCORYBRIDGE (COTED’IVOIRE)……………………………….167
Chapter 10: PROPOSITIONS AND RECOMMENDATIONS……………………………………….176
A – Guidelines for BOT road project development under Public – Private Partnership...176
B- Recommendations: 10 Golden rules of project risk management……………………...183
CONCLUSION…………………………………………………………………………………………..189
REFERENCES……………………………………………………………………………………………..191
C- Risk matrix in PPP transaction ( see matrix bellow)…………………………………………..197
FIGURES
Figure 1: Process of selecting a PPP – Based BOT project
Figure 2: JV-type and hybrid-type schemes
Figure 3: Saaty’s (2001) ANP Project Rating Method
Figure 4: Hybrid project (Type 2) (Section separation)
Figure 1b: The prototype DSS process flowchart (Mohamed & McCowan, 2001)
Figure 1E: Taxonomy of Risks in BOT Projects (Source: UNIDO 1996)
Figure 2a: Non-Financial Factor Interdependence for Analysis Case Two
Figure 2c: Influence Diagram for BOT Road project
Figure 2F: The project risk management process
Figure 3a: PPP procurement mode and extent of participation and risk-taking by the public and private parties
Figure 3 F: Waterfall diagram.
Figure 4a: Risk allocation versus project efficiency and total cost
Figure 5a: Dynamic process for allocating and monitoring risks Planning under PPP
Figure 6A: The Security Triangle in Project Risk Management
Figure 7A: Phases in BOT Project
Figure Sa: Project risk phases
TABLES
Table 1: Rotated factor matrix (loading) of enhancing VFM in PPP/PFI projects
Table 1a - Non-Financial Factors Input Weightings and Impact Values - BOT Project
Table 2a: Comparison of Analysis One and Two Results
Table 1D: Summary of recent researches in the area of risk assessment
Table 2D: Limitations of commonly used risk analysis techniques in PPP projects
ABSTRACT
Public Private Partnership (PPP) project arrangements have become popular all over the world for provisioning of public infrastructure and services. The essential purpose of such arrangements is to leverage private sector know-how, efficiency and capital. While attempting to review the structured methods and tools for risk management over the whole lifecycle of PPP projects, this thesis identifies that current risk management processes have a restricted focus on the management of project uncertainties. They consider only the ‘threat’ perspective and fail to take note of flexibilities in long-gestation projects. Moreover, experiences suggest that interrelationships between project components are too complex to be resolved by the traditional tools. A new approach is necessary to analyze the project in totality provides is therefore considered an alternative tool and this paper analyses the utility of PA to assess and manage the complex risk issues of PPP project in developing countries.
ACKNOWLEDGEMENT
This thesis work represents far more than just my job. Rather, it is the product of the support and collaborative input of many people. It is now time to express my sincere gratitude to all those individuals- My academic tutors and team of professionals at African Development Bank and BNETD (Bureau National d’Etudes Techniques et de Développement).
Most importantly, my respects and gratitude for being a moral support in all aspects.
First, I would like to thank Mr. VALCIN F, my academic advisor for his suggestions and his tremendous assistance in clarifying the terms and organizing the structure of my work. I also thank him for his precious time, valuable suggestions, and encouragement on my subject. A special thanks to Professor. ZAGBAI Tape we never get met during the thesis writing period. His previous study of failure BOT case in Cote D’Ivoire shows me the methodology of research on such kind of case.
Second, I thank Mrs Rina LehnhoffAdmissions Counselor; my first contact at AIU for these advises she gave me when I submitted my admission.
Third, the author would like to thank MR DON Mello, Managing Director of BNETD.
Finally, I would like to thank my family. My parents have always been there for me.
CHAPTER 1 – INTRODUCTION
Public Private Partnership (PPP) in infrastructure concerns a “long-term contractual arrangement between a public sector agency and a private sector concern, whereby resources and uncertainties are shared for the purpose of developing or refurbishing a public facility” (Li 2005). PPP is currently used for public procurement by many countries. Several types of PPP structures have been introduced worldwide and they differentiate upon the responsibilities and risk allocation between the public and private sectors. The PPP spectrum ranges from a simple commercialization of assets that remain under public ownership on one side, right through full privatization of facilities on the other, with several schemes with varying degrees of private-public financing. In India, since 1995 a number of infrastructure projects in various sectors such as highways, airports, seaports, energy etc have been introduced in PPP mode. Infrastructure projects are considered generally risky. However, the characteristics of the risk depend highly on the type of procurement being adopted for managing the project. One of the popular methods of PPP procurement currently used in the Indian highways sector is the Build-Operate-Transfer (BOT) model. In the BOT model, the private party builds, finance, operates and maintains the facility for a predetermined period, called “concession period”. During this period, tolls are collected from the road users by the private party. The type of contracts for procurement of these projects, called the “concession agreement” vary widely in the final form depending on the apportionment of risk and the scope of work among various parties involved in these PPPs.
Types of risks in PPP projects are widely documented and classified in two broad categories: external and internal. External risks are associated with political and legal conditions, economic conditions, social conditions and relationships among project participants. The internal risks, on the other hand, relate to development, construction and operations of infrastructure facilities. These risks vary with the stages of the projects, i.e. the planning stage; the design stage; the construction phase and the operations phase. The objective of risk assessment is to serve as a precursor to exploring all feasible options towards its management and to analyse their outcomes. There are several models proposed by various researchers in the past for assessing risks and uncertainties. This thesis analyses contributions of past researchers in this area and proposes a new approach called as system dynamics approach for the risk assessment.
1.4.Context and background of the thesis
In many developing countries, rapid economic growth is outstripping infrastructure supply (Gupta and Sravat, 1998). Governments in these countries are unable to fund vital infrastructure development and rehabilitation, so they are increasingly turning to large international firms as a source of funding through concession contracts such as Build-Own-Transfer (BOT). These firms generally have a greater credit standing and capacity to finance the large scale projects. If procured properly, the BOT option presents a win-win-win solution for governments, private sector firms, and the community at large. From the government’s perspective, private sector participation offers off balance-sheet funding whilst bringing an added advantage of cost and resource efficiency to the project. From the private sector’s perspective, BOT projects present great opportunities to expand market share and earn higher returns. Finally, thanks to a user pays system, the community at large does not experience taxation increases.
However, although globalization has created greater opportunities for construction companies to expand their market share abroad and earn higher returns, almost 15% of the top 225 global contractors have sustained losses on their international projects (Han and Diekmann, 2001) despite the fact that international projects are generally more profitable than domestic projects. Such losses can mainly be attributed to the difficulties experienced in assessing and evaluating the impact of non-financial (risk) factors on international projects (Dailami et al., 1999, Ho and Liu, 2002, Zhi, 1995), and more specifically on BOT projects in developing countries (Baloi and Price, 2002, Gupta and Sravat, 1998, Kumaraswamy and Morris, 2002, Ozdoganm and Birgonul, 2000). BOT projects are by nature long-term investments involving complex organisational structures. Over the lifespan of these projects the legislative, political, social, market, and economic environment could all change significantly. This is especially the case in developing countries, where the social, political and economic conditions are unstable. Thus a high degree of risk and uncertainty surround BOT investment opportunities in these countries and it is critical that adequate identification, assessment, and evaluation of non-financial (risk) factors take place at the feasibility stage. This thesis argues that a Decision Support System (DSS) would be beneficial to users, during this stage, in evaluating the impact of such factors, individually or in combination, on the investment opportunities at hand.
1.5.Area of the research
History and past case always delivered valuable resource and experiences. People whoignore the past destined to relive it. A person unaware of mistakes made by others islikely to repeat them. The wise person studies the past to avoid its pitfalls and benefitsfrom its achievements.
Since late 1980s, research work has been carried out to study the risk management ofBOT projects in developing countries (Tiong, 1990, 1992, 1995a; McCarthy and Tiong,1991; B&M, 1996; Donnelly,1997; Nielsen, 1997; Ruster, 1997; Staigerwald, 1997;Westring, 1997).
However, there has been still little research nowadays that focused specifically on themanagement of unique or critical risks of developing countries BOT/PPP projects, also there is littleresearch based on two opposite cases to illustrate that the methods are practically.
The main research (Staigerwald, 1997; CIRIA, 2002; Clifford and Erik 2005) on riskmanagement indicates that the process of risk management consists of risk identification,analysis and risk mitigation followed by confirmation that the risk management actionswere implemented adequately. One important goal of this study is therefore toidentify the unique or critical risks associated with developing countries BOT projects which aredifferent from those in other sectors and in other countries. These risks areunique or critical to the foreign investors and developers; hence special attention shouldbe paid in taking corresponding risk management.
The objectives of the study are:
- Identify the unique or critical political and currency risks associated with developing countries BOT projects;
- Recommend actions that are available to manage these risks; and
- Provide a risk management framework as guidelines for project promotersplanning to invest in future BOT projects in developing countries.
Although the objectives have been basically achieved in the course of the case study, it isnot appropriate to state the findings in this study being enough. Further studies are to beneeded to detailed aspects of the cases and topic. As the title of the thesis has indicated,this thesis will report on risk management and recommendation based on the study of one case in Ivory Coast.
1.6.Research hypothesis and methodology
The study does not have a clearly defined research hypothesis, but it has two key researchquestions to which answers would be sought.
- Which kind of particular risk can adversely affect even damage the BOT/PPPproject
- What tactics the successful projects have show us to avoid BOT/PPP related risks.
To this end it will attempt to find out to what extent does the evidence from the casestudy reflects existing risks and how these be addressed or lose-control.
It is anticipated that answers to these questions will form the basis for makinginvestigative recommendations and suggestions.
The methodology used in this study includes:
a) A comprehensive literature review together with two case studies to developinitial lists of unique or critical risks associated with BOT/PPP in developing countries andgenerally available mitigating measures for these risks;
b) Structured telephone interviews and questionnaire with personnel and staff whowere involved in these cases;
c) One case study to provide additional insight concerning contract clauses and arisk management framework for investing in Ivory coast forthcoming BOT/PPP.
CHAPTER 2 - THEORY AND DEFINITION OF BOT PROJECTS CONCEPT
While the term BOT is a relatively new one, the concept has been in operation for centuries. Most of the early turnpikes and canals in this country operated on the principle that a grantor, usually but not always a government body, would offer an operating license to a concessionaire for a long term contract to develop and operate a transportation company with exclusive rights to a length of road or river. Over time, the concept was extended to include frontier postal services, local telephone services, electrical utilities and many municipal service functions such as land management. In this way, infrastructure upgrades were financed without public finding, and a method of long-term payback from operating revenues was established with a contract period deemed lengthy enough to make the operating concession a lucrative project.
In the modern setting, a cash-strapped corporation, municipality, county or state will enter into a profit sharing agreement with a concessionaire. This profit sharing principle is the key aspect differentiating the BOT approach from the outsourcing arrangements commonly undertaken in this country. The concessionaire will operate as an independent business organization contractually accountable for a series of technical, operational and service related goals. The contract will often be setup such that the risk of revenue fluctuation is offset to the concessionaire by means of a fixed fee payment obligation to the owner. The upside to this arrangement, however, can be considerable if revenues are better than anticipated. Obviously, a well-crafted business plan for the concessionaire including carefid financial modeling and disciplined cost-control procedures will be essential.
A number of variations on the Build-Operate-Transfer theme have emerged from the experience of international infrastructure development. These differ mainly in the exact ownership and payment arrangement between the owner and the concessionaire on completion of the construction portion of the contract. The main approaches are summarized below:
The contract will specify the upgrade and operation of the enterprise by the concessionaire for a fixed period of time followed by the transfer of all facilities and equipment back to the owner. / The concessionaire is essentially buying the basic facility in installments from the owner, with the facility and it's upgrades provided as security over the repayment period. On completion of the contract, ownership reverts to the concessionaire. / The concessionaire builds and transfers a facility to the owner but exclusively operates the facility on behalf of the owner by means of a management contract. / The concessionaire builds a facility, leases out the operating portion of the contract, and on completion of the contract, returns the facility to the owner.
The capital required for equipment or facilities upgrades will be the main determinant in setting the length-for a BOT contract. Infrastructure- development projects funded by means of BOT contracts in developing countries will typically require capital investments of $50 million or more and an operating period of greater than 10 years. A number of dynamic factors affect the overall structure of the contract and particularly the length of time required for the concessionaire to achieve a break-even on the capital investment. In proposing a BOT concession to an existing owner, the following factors m-ust be considered and allowed for: